Can Easy Money Save the Eurozone?
Europe’s central bankers are taking a page out of the Federal Reserve’s playbook, said Matt O’Brien in WashingtonPost.com. The European Central Bank announced last week that it will launch a $1.3 trillion asset-purchasing program to “reverse the continent’s long, slow slide into economic stagnation.” The strategy, known as quantitative easing, involves snapping up $69 billion in government and private bonds each month, mirroring the Fed’s recently ended, six-year QE program, which some analysts have credited with helping keep the U.S. economy in a sustained recovery mode.
But Europe might be a different story, said John Cassidy in NewYorker.com. In theory, QE “causes the price of bonds to rise, which translates to a fall in interest rates.” That triggers an increase in borrowing, and, eventually, more “spending by businesses and households,” which helps pull the economy out of its slump. But the ECB’s biggest challenge will be psychological. The eurozone has been “trapped in a malaise” for several years, and as a result, “businesses have been reluctant to make capital investments, consumers have been reluctant to spend, and banks have been reluctant to lend.”
Good luck turning that around, said Paul Wallace in Economist.com. Under its version of QE, the eurozone’s 19 member nations will buy their own governments’ bonds “and bear any risk of losses.” That and other measures are designed to protect ECB shareholders in case of a sovereign default—like what will happen if Greece goes ahead with its plans to abandon the euro. The ECB has hedged against that by announcing that Greek bond purchases will be off the table when the QE program starts in March. In exchange, the central bank’s purchasing program is more aggressive than expected. But the trade-off “is an important breach in the ECB’s usual risk-sharing arrangements,” which could lead to the kind of fragmentation it has long sought to avoid.
It’s “still a worthwhile effort,” said Jordan Weissmann in Slate.com. With unemployment at more than 11 percent, anemic growth, and the specter of a deflation crisis, the ECB “needs to do something to revive the eurozone, and quantitative easing is the biggest untried tool in its arsenal.” But it’s no panacea. Until Europe can shift its focus away from reducing debt and toward “fiscal stimulus and reforms that would fix its calcified, uncompetitive labor market in the most troubled countries,” the ECB will face an uphill climb.
This all goes to show there is such a thing as being “too responsible,” said Paul Krugman in The New York Times. By ignoring “the evidence in favor of a narrative that placed all the blame on budget deficits,” Europe embraced a policy of austerity and an inflation phobia that doomed its economy from the start. “True, there have been times when being tough meant reducing deficits and resisting the temptation to print money. In a depressed economy, however, a balanced-budget fetish and a hard-money obsession are”—and were—“deeply irresponsible.”
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